Robert Shiller, Nobel economist, alert to stock market bubble

'I am not yet sounding the alarm. But in many countries stock exchanges are at a high level and prices have risen sharply in some property markets,' Shiller told Der Spiegel. 'That could end badly.' 

"I am most worried about the boom in the US stock market. Also because our economy is still weak and vulnerable," he added, saying he believed the technology and financial sectors were valued too high.

DYI Comments:  The Great Wait Continues as this over blown stock market plays itself out.  For the truly long term investor this is nothing more than a blink of an eye.  For the speculator it will seem like eternity.  For those of you who crave simplicity or you know of folks who need that approach to investing here is my two fund approach.

Tactical Asset Allocation for the Defensive Investor!

The Wellesley Income Fund and Wellington Fund: the tactical asset solution for the defensive investor.

The term defensive investor was coined by Benjamin Graham in his book, The Intelligent Investor. His premise was based on his idea that the enterprising [aggressive] investor would change his allocation between 75% - 25% stocks and 25% - 75% bonds depending on his outlook for the markets. the simple implication for the defensive investor would be 50% cash and bonds or higher allocation; with stocks being in a supporting role of 50% or less. This will hone in on the emotional stance of the conservative investor - investing is not a "macho" sport but a state of mind.

What if the defensive investor wanted to move away from his chosen locked in asset allocation when markets where driven to historical highs or lows. The first practical solution to determining what is high or low is the average dividend yield. When the dividend yield of the S&P500 is below the average then the market is expensive and with the yield above, it would be considered cheap. Currently [as of 1-21-14], the average yield since 1881 as reported by Multpl.com is 4.43%. Clearly the U.S. stock market is still in the clouds with a dividend yield of 1.90%. Our standard at DYI for making a change in the asset allocation is when the dividend yield is 25% greater than or less than the historical average yield.

What is the best method to deploy this strategy? John C. Bogle, and his wonderful book Bogle on Mutual Funds [soft cover] on page 245, do the talking.

Another sort of tactical allocation strategy involves changing the stock/bond ratio based on the relative outlooks for the respective financial markets. But since no one can ever be sure of the future path of the financial markets, the tactics I recommend would place severe restrictions on the extent of the allocation changes. Specifically, I would vary the desired strategic balance by no more than 15 percentage points on either side. A portfolio targeted at 50/50 would never have less than 35% in stocks nor more than 65%.

The Wellesley Income Fund is mandated to have 35% in stocks. The Wellington Fund is mandated to have 65%. This could not be more fitting for the defensive investor desiring a modification in allocation due to markets making a significant change in value.

DYI